An unincorporated association is established when two or more persons come together for a common purpose other than to make a profit.
It will usually have a constitution or a set of rules and a management committee which will be elected to run the association on behalf of its members.
Most amateur sports clubs in Scotland are set up as unincorporated associations and for good reason. It is easy and cost-effective to establish and there are none of the filing requirements which come with incorporation.
Under the current law in Scotland, an unincorporated association does not have separate legal personality. This means that the law does not recognise an unincorporated association as a separate entity distinct from its members or its management committee. One of the consequences of this is that an unincorporated association cannot in its own name:-
The lack of separate personality creates a number of potential legal difficulties for committee members who enter into contracts or carry out transactions on behalf of their association.
If committee members own or lease property in their own names and one of the committee members leaves the association, that departing member’s interest in the property will need to be transferred. This can often be overlooked by sports clubs who tend to have a higher turnover of committee members than others.
If your club holds property, we would recommend making enquiries to establish in whose name the property is held in. If the property is held by a person who is no longer a committee member at your club, take steps to transfer their interest as soon as possible.
Committee members who enter into contracts on behalf of their association can become personally liable under those contracts.
Contractual liability will ultimately rest on those who have authorised a contract. For instance, if a committee member was to enter into a contract to purchase sports equipment and the contract was authorised by the management committee, each committee member could be held liable under the terms of the contract should something go wrong.
Personal liability of committee members is not simply restricted to commercial contracts. A member of staff who has been employed by the management committee or by an individual committee member with the authority of the management committee would have a right of recourse against any of the committee members for a breach of their employment contract.
Furthermore, in certain circumstances committee members can be held personally liable to compensate a third party for harm they have suffered as a result of the wrongful actions of the association. Wrongful actions can include a negligent act causing personal injury, an event causing nuisance to a neighbour or simply the making of a defamatory remark.
The hard work and dedication of committee members are vital to every unincorporated association and so it may be of some comfort to know that there are some practical steps which can be taken by an association and/or their committee members to exclude or at least limit the extent of personal liability:-
A better understanding of the legal status of an unincorporated association should encourage committee members to regularly attend committee meetings and be pro-active in decision-making
If there isn’t an indemnity in an association’s constitution, it should consider including one although an indemnity is only of value if the association has funds to pay a claim
Authority to enter into a contract or arrangement will not exclude a committee member from personal liability although it should at least ensure that all of the other committee members are also liable
Whilst an association will have to pay insurance premiums, this outlay will be worth every penny it should a claim ever be forthcoming
It is a myth that all legal advice is expensive – at Morton Fraser, we provide sports clubs with fixed fee quotes so they have certainty about costs.
If your club is an unincorporated association and it is concerned about the personal liability of its committee members, it should consider the possibility of incorporating as either a company limited by guarantee or as a company limited by shares.
Company limited by guarantee
Companies limited by guarantee are often the entity of choice for sports clubs, charities and other non-profit making organisations.
A guarantee company has separate legal personality and therefore can (in its own name) enter into contracts, sue or be sued, own or lease property and employ members of staff. In addition, a guarantee company has no share capital and does not pay dividends to its members. Instead, each member simply guarantees to pay a small amount of money if the company ever becomes insolvent (can be as little as £1).
If the company becomes insolvent, each member will only be liable to pay up to the amount which they have guaranteed.
The constitution of the company is set out in its articles of association and the members of the company will usually have the power to elect the directors who will have the responsibility of running the company on a day-to-day basis.
Company limited by shares
Whilst there are similarities between companies limited by shares and companies limited by guarantee such as having separate legal personality and limited liability (for companies limited by shares, members’ liability is limited to the amount unpaid on any shares held by them), one of the fundamental differences between the two is that companies limited by shares are generally established with a view to making a profit.
A company limited by shares will have a share capital and its members will be issued with shares and will be entitled to the payment of dividends.
Advantages/Disadvantages to incorporation as a limited company
There are several advantages and disadvantages to incorporation. These are:-